Belgium restructuring exercise weighs on Crompton results

The power business, which contributes the bulk of the company’s revenue, reported a disappointing performance.

Updated: Mon, Nov 05 2012. 11 27 PM IST

The shares of Crompton Greaves Ltd have plunged 8% following the company’s September quarter earnings. Net profit declined 64% to Rs.42.05 crore following a shutdown at the company’s Belgium plant. A restructuring exercise in its Belgium operations started in July because of over capacity and pricing pressures in Western Europe. This has led to the operating profit declining 39.6% to Rs.136.48 crore from a year ago.

Crompton’s operating profit margin also slipped 370 basis points (bps) from a year earlier and 126 bps from the preceding quarter. One basis point is 0.01%.

Interest costs almost doubled to Rs.19 crore following the acquisition of smart grid automation company ZIV in Spain which led to increased debt. Long-term borrowings rose to Rs.1,352.7 crore in the September quarter from Rs.616.3 crore at the end of the March quarter.

Net sales grew 8% to Rs.2,924 crore, buoyed by a 14% increase in order inflows. Order backlog increased 32% to Rs.9,400 crore because of a slowdown in execution and weak demand from Europe.

Among the segments, the power business, which contributes the bulk of the company’s revenue, reported a disappointing performance. This segment’s revenue rose 1% and profit declined 89% from a year ago. Growth in earnings before interest and tax (Ebit) in the power business slowed to 10% against an average of 17% between FY09-12, said an Ambit Capital Research note.

Consumer segment revenue, which contributes around 20% to total sales, grew 22% and profit rose 2%, but Ebit margin declined 180 bps from a year ago because of higher sales and promotion expenses. The industrial segment, which contributes around 16% of revenue, grew 3% and profit increased 26% with 260 bps Ebit margin expansion on the back of improvement in product mix and increase in exports to the Middle East, said analysts.

Inventories surged to Rs.1,743 crore in the second quarter, compared with Rs.1,223 crore at the end of FY12 because of the overall slowdown.

Most analysts have started downgrading their FY13 and FY14 earnings estimates because Crompton Greaves is yet to book a significant portion of restructuring costs on the balance sheet, especially costs related to employee retrenchment. The management revised FY13 revenue growth to 8-10% from the 12% earlier and Ebitda (earnings before interest, tax and depreciation) margin to 5% from the 8% earlier.

The stock has fallen 10% year-to-date, and is trading at 16 times its FY13 price-to-earnings multiple, but a further downside cannot be ruled out. Also, the domestic power business is expected to remain subdued because of increasing competition from Chinese and Korean equipment makers which will weigh on margins.